On November 9, 2017, we got our first look at the Senate Tax Bill following the release of the House Tax Bill (see Nonprofits and Tax Reform: 2017 House GOP Plan). Both Bills are proposing major tax reforms, highlighted by $1.5 trillion in tax cuts mostly benefiting the ultra-wealthy. According to the nonpartisan Tax Policy Center, the wealthiest 1% would receive 21% of the House Tax Bill’s benefits in 2018, which would grow to nearly 50% of the House Tax Bill’s benefits by 2027 (Business Insider). These benefits would come at the great expense of seniors, the poor, and the disabled as the Senate Tax Bill would cut $473 billion from Medicare and as much as $1 trillion from Medicaid over the next 10 years (Vox).
Nonprofits and all of their beneficiaries would also be seriously harmed should either Bill be passed without substantial change. Dan Cardinali, president of Independent Sector, called the House Tax Bill “a brutal attack on civil society and democracy.” Tim Delaney, president of the National Council of Nonprofits, called it “an insult to the people of this country.” The National Law Review recently published an article titled Senate Tax Overhaul Bill Slaps Tax-Exempt Organizations.
The Senate Tax Bill has several common provisions to the House Tax Bill but also some major differences of which nonprofits should be aware.
- Doubling of the standard deduction for individual taxpayers. While this may have some initial appeal to many taxpayers, it will also reduce the number of itemizers from about 1 in 3 taxpayers to about 1 in 20. The effect will be to remove the tax incentive for an estimated $95 billion of annual charitable giving, which could result in depressing annual charitable giving by as much as $13 billion according to one study. NonProfit Times. The Tax Policy Center estimated a reduction of giving between $12 billion and $28 billion. Chronicle of Philanthropy.
- New excise tax on private colleges and universities. Similar to the excise tax on net investment income applicable to privation foundations under IRC 4940 (see above), the Act would impose a 1.4% net investment income excise tax on private colleges and universities that have at least 500 students and assets (other than those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $250,000 per full-time student (compared to $100,000 per full-time student in the House Tax Plan) .
- New excise tax on compensation of more than $1 million. Under either Bill, a tax-exempt organization (including, but not limited to, 501(c)(3), (4), (5), (6), and (7) organizations and 527(e)(1) political organizations) would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the taxable year.
- Unlike the House Tax Bill, the Senate Tax Bill does not include a weakening of the Johnson Amendment, the prohibition against political campaign intervention applicable to all 501(c)(3) organizations. In this respect, the Senate Tax Bill is favorable to the House Tax Bill, which could turn churches, temples, synagogues, mosques, and other house of worship into political operations. See our posts Don’t Let Congress Convert Charities (including Churches) into Dark Money Political Organizations and Johnson Amendment: National Association of State Charity Officials Weighs In.
- Like the House Tax Bill, the Senate Tax Bill would double the exemption levels on the estate tax, but unlike the House Tax Bill, the Senate Tax Bill would not repeal the estate tax after 6 years. The current exemption levels allow couples to transfer almost $11 million without any estate taxes. Upon the increase in the exemption levels, only the wealthiest 0.2 percent of estates would pay any estate tax. Scholars and the Congressional Budget Office have estimated bequest giving would drop anywhere from 6 percent to 37 percent. Nonprofit Quarterly.
- The Senate Tax Bill does not repeal the authority of state and local governments to issue qualified private activity bonds, which generally include all tax-exempt bonds issued for the benefit of 501(c)(3) organizations that are not governmental bonds.
- The Senate Tax Bill does not simplify the 4940 excise tax rate on private foundation net investment income, maintaining the two-tier structure: 2% with the possibility to reduce this rate to 1% by meeting a minimum level of qualifying distributions (the average of their distributions from the previous five years plus 1% of the net investment income for the tax year).
- Under the Senate Tax Bill, unrelated business taxable income, including for purposes of determining any net operating loss deduction, will be computed separately with respect to each such trade or business. This would mean organizations could no longer use losses from one unrelated business to offset the income from another unrelated business.
- Under the Senate Tax Bill, any sale or licensing by an organization of any name or logo of the organization (including any trademark or copyright relating to such name or logo) will be treated as an unrelated trade or business regularly carried on by such organization.
- Under the Senate Tax Bill, excess benefit transaction penalty taxes (also known as intermediate sanctions) may be applied against not only disqualified persons who received the excess benefit and organizational managers who knowingly participated in the transaction, but also against the organization itself (unless the participation of the organization in the excess benefit transaction was not willful and was due to reasonable cause).
- Under the Senate Tax Bill, 501(c)(5) and 501(c)(6) organizations would be added to the list of applicable organizations for purposes of the excess benefit transaction rules.
- Under the Senate Tax Bill, the rebuttable presumption of reasonableness, which an organization can currently obtain to help prove a transaction is not an excess benefit transaction, would be eliminated.
- Under the Senate Tax Bill, an organizational manager could no longer avoid an excess benefit transaction penalty tax for the mere fact that the manager relied on professional advice.